Arthur Andersen

Consulting Schemes

For more than half a century, Arthur Andersen, founded in 1913 by Arthur Andersen, who had a reputation for acting with integrity, was primarily an auditing firm focused on providing high-quality standardized audits. But a shift in emphasis during the 1970s pitted a new generation of auditors advocating for clients and consulting fees against traditional auditors demanding more complex auditing techniques. The problem worsened when Andersen's consulting division began generating significantly higher profits per employee than the auditing division. Auditing revenues had flattened and growth came primarily through consulting fees. Consulting schemes publicly praised by Andersen partners included the following:

• Using highly qualified consultants from other regional offices to market their services during client presentations and then not including them on the project team after the contract was obtained
• Determining the client's budget for consulting services and then selling as many consulting services as possible up to that budget limit, even if the services were unnecessary
• Charging clients a partner's high billable hour rate and then assigning most of the work to lower paid, and less qualified, staff

The Enron Audit

The combination of more complex financial statements, more aggressive accounting techniques, greater concern for customer satisfaction, greater dependence on consulting fees, and smaller cost-effective sampling techniques created many problems for auditing firms. Andersen's Houston office was billing Enron $1 million a week for auditing and consulting services, and David Duncan, the lead auditor, had an annual performance goal of 20% increase in sales. Duncan favorably reviewed the work of Rick Causey, Enron's chief accounting officer and Duncan's former colleague at Andersen. Duncan let Enron employees intimidate Andersen auditors, such as locking an Andersen auditor in a room until he produced a letter supporting a $270 million tax credit. Andrew Fastow, Enron's chief financial officer, successfully lobbied for the removal of an Andersen accountant for questioning his aggressive accounting schemes.

The Indictment

In June 2001, the Securities and Exchange Commission (SEC) issued a cease-and-desist order against Andersen regarding any securities violations for its role in a $1.7 billion accounting fraud at Waste Management. Andersen partners were forewarned that any future violation would result in an extreme penalty from the Justice Department.

By late September 2001, Enron insiders knew the firm would publicly announce on October 16 a thirdquarter operating loss, its first ever, along with an after-tax nonrecurring charge of more than $1 billion. Both Enron and Arthur Andersen went into a crisis management mode to prepare for an anticipated SEC investigation. On October 12, Andersen's in-house lawyer requested that the director of Andersen's Houston office comply with the company's documentation retention policy—all extraneous documents should be destroyed.

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